In my previous article last week I tried to illustrate the point that one should start investing as soon as possible. This time I will try to prove that long-term investing and dividend reinvestment are important tools that would enable the shrewd dividend investor through good and bad times.
I recently stumbled upon a long-term chart of the Dow Jones industrial’s average which covers the period from 1920 to 2005. I have seen the long term chart of this stock market index multiple times before. The index rose from 107.23, which was the closing price for 1919 to over 11,000 by early August 2008. In a previous article I cited a research paper that showed that if dividend reinvestment was taken into consideration into the DJ index, its price would not stand at 11,000 but it would be several times over that.
Using just the value line annual dividends data for the 1920-2005 periods, as well as the final closing values for each year for the same period from DJ indexes I was able to perform the simple test of dividend reinvestment assuming a $107.23 initial investment on 12/31/1919 into a hypothetical index fund that tracks Dow Jones Industrials Average. In reality this period exceeds the usual person’s investing timeframe by two to three times, but nevertheless the results are truly amazing.
If your great grandfather bought the hypothetical Dow Jones index fund in 1919 for $107.23 and reinvested the dividends into more index fund shares, he would have seen his dividend income rise from $5.80 in 1920 to $8,715.12 by 2005.
Furthermore, the initial investment of $107.23 would have grown to a staggering $371,028.01. You could check the data from this spreadsheet below.
The results of this passive approach show that it pays to ignore the media and all their gloomy forecasts about “the end of the world” and just stick with your investment while methodically reinvesting your dividends.
Most people are told that it took twenty five years for the Dow Jones Industrials Average index to surpass its 1929 high after The Great Depression and the Second World War. This is not true – accounting for dividend reinvestment Dow Jones Industrials index was actually able to surpass its 1929 high about fifteen years later.
Another gloomy period for stocks was 1965 to 1982, when Dow was stuck in a range between 600 and 1050 points, while producing a mere 8% total return for a 17 year period. At the same time the annual dividends that Dow paid increased form $28.60 in 1965 to $54.10 in 1982. In addition to that, accounting for dividends, a $1000 investment in Dow would have been worth about $2334 by the end of 1982.
To summarize I believe that the best strategy is to ignore all the naysayer’s, talk about recession, depression and political instability and go long stocks for the long run.
Note: The table above has been updated to include data from 2006 - 2008. The original article included data from 1920 - 2005.